Are you aware of these tax changes?

This article was first published in the third quarter 2016 edition of Personal Finance magazine.

Taxation may be a certainty, but the rules are much less consistent. This year sees a few changes that might affect your tax obligations in future.

Provident funds. The harmonisation of pension, provident and retirement annuity (RA) funds has resulted in numerous revisions of the tax rules and subsequent reversals of those revisions.

It had been proposed that members of provident funds use part of their benefits on retirement to buy a pension (known as annuitisation) instead of receiving the full lump sum. This would align provident fund rules with pension and RA funds from the enforcement date, with special rules applying during a transition period to ensure that assets in the funds at the changeover date would not be affected. This proposal has, yet again, been postponed, to March 1, 2018. The current position is that a member of a provident fund is permitted to take the full retirement benefit as a lump sum at retirement.

Although the annuitisation of provident fund benefits has been put on hold, prompted by trade union opposition, new rules for deductions of contributions to retirement funds have been enacted. With effect from March 1, 2016, the tax deduction for current year contributions is set at 27.5 percent of the higher of a taxpayer’s remuneration or taxable income (in both cases excluding any retirement fund lump-sum benefit or withdrawal benefit, or severance benefit). The deduction is subject to a cap of R350 000 a year.

The limit includes premiums on group life assurance that comes with occupational retirement funds.

If, by 2018, agreement is not reached with the unions on the annuitisation of provident fund benefits, the tax deduction could be removed.

Medical credits taken into account for pay-as you-earn (PAYE) and provisional tax. With effect from January 8, 2016, all medical tax credits for taxpayers over the age of 65 may be taken into account for the calculation of PAYE and provisional tax. Previously, certain credits were available only on your annual assessment, possibly affecting a taxpayer’s cash flow. Eligible taxpayers should check their PAYE deductions to ensure that the maximum amount is taken into account to reduce PAYE.

It is now also possible for taxpayers over 65 to include these credits in full when preparing their provisional tax calculation.

Foreign employment income exemption. The general rule is that South African tax residents are subject to income tax on their worldwide income. There are certain exemptions – for example, employees who earn income while performing services outside South Africa for their employers.

The employee has to be outside South Africa for more than 183 days during a 12-month period, and part of that has to be more than 60 continuous days. The requirements are set out in section 11(1)(o)(ii) of the Income Tax Act. The legislation has not been amended, but the South African Revenue Service (SARS) has issued an updated draft version of Interpretation Note 16 (“draft IN”). Although this is not yet final and could change, it provides an indication of how SARS would like to apply the section in future. In particular, the draft IN states that it is “a common misconception … that all remuneration received or accrued during the qualifying period of 12 months is exempt. This is incorrect. Only remuneration received or accrued in respect of services rendered outside the Republic during the qualifying period of 12 months is exempt.”

The draft IN still allows for the 183-day period to consist of calendar days, not just working days – in other words, weekends, public holidays, leave and sick days outside of South Africa do count. However, the draft IN specifically differentiates between the number-of-days rule used to calculate the 183/60-day requirement and the determination of qualifying days to calculate the exempt portion of income. In this regard, the draft IN distinguishes between “a situation where a person is in employment and is actually outside of South Africa, but is not physically rendering services”, (such as a pilot who is employed, but is not required to fly for a period of time while away) and “a situation where a person is physically present outside of South Africa but is not in employment” all the time. The former can count the non-working days as qualifying days, whereas the latter cannot.

As the draft IN explains: “Days spent outside of South Africa when a person is not in employment do not qualify as days outside of South Africa under section 10(1)(o)(ii), and are thus not taken into account in the determination of the 183 days for purposes of the exemption. Such broken periods of employment may arise if an employee is employed at intervals. An employee may, for example, be employed on a contract basis and enter into separate employment contracts for each broken period of employment. The time in-between the contracts, where the employee is unemployed and where no services are rendered, do not qualify under section 10(1)(o)(ii) as days outside the Republic.”

Taxpayers with employment contracts offshore should therefore consider these contracts carefully to ensure that the exemption will still apply in their situation given SARS’s strict interpretation and closer scrutiny in future.

Common reporting standards, reportable arrangements and the voluntary disclosure programme (VDP). Common reporting standards require the signatory countries to obtain information from their financial institutions and to provide that information to other jurisdictions annually. South Africa is a signatory, together with numerous other jurisdictions, including countries that belong to the Organisation for Economic Co-operation and Development, as well as jurisdictions popular for offshore trusts, such as Bermuda, British Virgin Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Malta, Mauritius and Seychelles. This means SARS will obtain information about South African taxpayers’ offshore interests even if they exist in the form of directly held assets, such as bank accounts or interests in companies and trusts. Taxpayers should therefore ensure that their offshore tax affairs are in order and can withstand scrutiny from SARS.

In addition, SARS periodically sets out the types of transactions (“reportable arrangements”) that must be disclosed within certain time periods of entering into such transactions, failing which significant penalties will be levied. Notice 140 set out in Government Gazette No. 39 650, issued on February 3, 2016, includes the following: An arrangement in terms of which — (a) a person that is a resident makes any contribution or payment on or after 16 March 2015 to a trust that is not a resident and has or acquires a beneficial interest in that trust; and (b) the amount of all contributions or payments, whether made before or after 16 March 2015, or the value of that interest exceeds or is reasonably expected to exceed R10 million.

Excluded from this requirement to report are contributions or payments to offshore collective investment schemes.

Where taxpayers wish to regularise their tax affairs and pay tax on previously undisclosed income, they can do so under the VDP provisions set out in the Tax Administration Act.

In addition, the Minister of Finance in his 2016 Budget Speech announced a special VDP in respect of offshore assets and income. This programme will incorporate both tax relief and exchange control relief (whereas the VDP under the Act does not cater for exchange control contraventions).

The special VDP will operate for a limited period between October 1, 2016 and March 31, 2017. The two programmes offer different forms of relief and contain different restrictions, so taxpayers with undisclosed assets and income should consider both avenues carefully to assess how best to proceed.

Inclusion in estate duty of non-deducted contributions to a retirement fund. There is a change to estate duty calculations in respect of deaths recorded on or after January 1, 2016. Retirement fund contributions made on or after March 1, 2015 and not taken into account in the calculation of the deceased taxpayer’s taxable income will be required to be included in the estate and will be subject to estate duty. This amendment was put in place to counter a strategy by taxpayers to pass on a benefit to their estates by making large contributions to retirement funds, which would be free of estate duty and practically free of income tax.

Income arising in a deceased estate. Until March 1, 2016, income arising in a deceased estate for the benefit of heirs or legatees was deemed to be incurred by the heirs or legatees and included in their income. The heirs or legatees could claim any corresponding expenses against the income.

For deceased estates that arise on or after March 1, 2016, the legislation has changed to require that income received by, or accruing to, a deceased estate will no longer be attributed to heirs or legatees, but will be taxed in the deceased estate. Whether heirs/legatees win or lose will depend on whether the income is taxed at a higher or lower rate in the estate than it would have been in their hands.

* Kari Lagler is an independent tax consultant and registered tax practitioner. The information in this article is of a general nature, and readers should obtain expert advice for their specific situations.